FinTech in India – The Road Ahead

Over the last few years, the way payment is done in India is similar to way it occurs in global markets with a small time lag. India now represents one of the largest market opportunities for payments. With a population of over 125crs being pushed to go digital, India is poised to make the most of digital developments transforming the payments space.

Regulatory Changes Enabling Digital Transactions:

There are a lot of regulatory changes that needs to take place before payments businesses start flourishing in India like:

  1. No Requirement of KYC for Small Transactions: As per current RBI guidelines, customers are not required to undergo a KYC process for transactions up to INR 10,000 per month on prepaid instruments. This guideline makes it easy for customers to just download the wallet of choice and use for the transaction.
  2. Mobile Wallets No Two-Factor Authentication (2FA): The RBI currently mandates the inclusion of a two-factor authentication (2FA) for transactions made with Indian debit or credit cards, irrespective of transaction value. This requirement though is necessary for security it is cumbersome due to significant failed and dropped transactions. But, a mobile wallet requires a customer to undergo the 2FA process only while loading funds from other bank instruments. Additionally, such wallets have limits on the value of transactions and hence reduce exposure to frauds.
  3. Aadhar Is Simpler: The usage of Aadhar as a national identity instrument has made the KYC process extremely easy. By linking a customer’s mobile number electronically to his/ her Aadhar account, the process is now simpler and hassle free. The Jan Dhan Initiative has seen over 270 million accounts being opened. This has brought millions under financial inclusion and has made biometric authentication a reality.
  4. Unified Payments Interface (UPI): The Unified Payments Interface launched by National Payment Corporation is a system that powers multiple bank accounts, several banking services features like merchant payments and fund transfer in a single mobile application. Thus it is an integrated system. The benefit that it will provide users the flexibility to access bank accounts through any PSP connected to the UPI set-up. Moreover, customers will be able to choose a virtual address in any format (mobile number, AadharID, email ids etc.). Bhim (Bharat Interface for Money) app is launched by Prme Minister Narendra Modi to facilitate e-payments directly through banks and drive towards cashless transactions.
  5. Bharat Bill Payment System (BBPS): Owned and operated by NPCI, BBPS is envisioned as an ‘Integrated Bill Payment System’ that is accessible, interoperable, cost effective and allowing multiple payment modes. Bill payments form a major component of retail payment transactions. Cheque and cash payments continue to be predominant; particularly at the billers’ own collection points

Encouraging trends in Digital Transactions :

India truly seems to be going digital and this is validated by the exponential growth of its digital marketplace. In the year 2015-16, around 747 million transactions occurred through mWallet and prepaid cards combined, whereas only 390 million transactions happened through mobile banking. The majority of transactions through mWallet are smaller with an average ticket size of INR 620, while mobile banking transactions are on an average INR 10,400 per transaction. mWallet is largely preferred for micro transactions while high value transactions take place through mobile banking.

Supported by a favorable regulatory environment and growing younger population of India digital payment in India can flourish.

Effects of demonetization on Cashless Economy:

In the wake of demonetization, RBI has started publishing daily data on select payment systems with a lag of one/two day(s). Over past two months, while the volume of electronic transactions has gone up substantially, the total value of these transactions has not increased significantly.

Value of total transactions using various digital Channels

1

Source: RBI, CEIC

Number of total transactions using various digital channels (mn)

2

Source: RBI, CEIC

Usage Of Debit/Credit Cards Increases Significantly:

The total value of transactions at POS has increased sharply over past two months. Total transaction value at POS increased from INR333b in October-16 to INR352b in November and further to INR442b in December. It implies that the value of transactions at POS increased 47% YoY (6% MoM) in November-16 and 87% YoY (25% MoM) in December-16, as against 41% YoY (27% MoM) in October-16.

3

Source: RBI, CEIC

PPI Has Also Picked Up In December:

Demonetization, however, seems to have helped increase the usage of PPIs. Although the amount per transaction has not changed significantly, the total amount of transactions in December-16 stood at almost INR20b, as against INR13b in October-16.

While the usage of various digital channels has increased over past three months, aggregate data on retail electronic transactions do not show any sudden surge in digital transactions. With the currency in circulation falling from INR18t to almost INR9t, higher growth in electronic transactions confirms a considerable dent in consumer demand over past two months.

Impact of Budget 2017:

The government in budget 2017 focused on pushing digital transactions post demonetization. Investment in building a strong broadband digital infrastructure will set to improve coverage and quality of service in India. This is going to be critical in the expansion of the digital economy, especially for financial transactions, education and government welfare schemes. Allocation under the Bharat Net program has been budgeted at Rs 100 billion, which marks a near-two-thirds increase over the previous year. This will boost digital transactions in the near future.

Conclusion:

The government will have to create conditions which must not necessarily create cash shortages and must push cashless transactions to a threshold level after which the network effect will take over. India may not become a cashless economy in the foreseeable future, but it needs to reduce its high dependence on cash to bring in much needed efficiency and transparency in the system.

– Aditi Goyal

– Ajith Reddy Konda

(NMIMS Mumbai)

References:

http://www.livemint.com/Opinion/XGbavEnoeP7dZITeh21MRM/Making-India-a-cashless-economy.html

http://www.livemint.com/Opinion/XGbavEnoeP7dZITeh21MRM/Making-India-a-cashless-economy.html

http://www.thehindu.com/news/national/Cashless-economy-is-a-boon-says-Nobel-laureate-Muhammad-Yunus/article16994985.ece

http://www.financialexpress.com/economy/narendra-modis-dream-of-cashless-economy-comes-alive-at-sabarimala-sales-revenue-via-e-payments-rises-to-15/499600/

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